Press Releases
Perhaps the biggest story in the market over the last couple months has been the mean reversion/catch-up/rotation trade between the market's "haves" (megacap tech) and "have nots" (small caps, cyclicals, value, etc). The idea behind the move is simple enough. When one segment of the market outperforms by a large margin over a long period of time (think Mag 7 since 2022), eventually traders' figure there is opportunity in that gap and decide to "go the other way" - at least for a while. This trade is definitely not new as we've seen many such rotational moves over the years.
The Argument
One of the biggest features in the market that seems to be driving this move - at least in part - is the massive "argument" going on these days over the state of the AI trade.
On one hand, you have the fast-money "masters of the universe" who run money at hedge funds and Wall Street bank trading desks. You know, the gang that defines long-term as their lunch appointment on Thursday. And the crowd that seems to play fast and loose with facts, interviews, and media publications. In this world, a trade "narrative" is all that matters. The narrative doesn't have to be true or even makes sense. No, as long as it can be easily and often repeated, the trade can live on.
This is the crowd that has decided that AI just isn't going to work - especially not for the likes of Microsoft (MSFT), or Meta (META), or Oracle (ORCL), or ServiceNow (NOW), or Salesforce (CRM), or heck, even Palantir (PLTR) - the company that just reported perhaps the best earnings in the history of software. The hedgie crowd that according to CNBC's sources at major funds on Wall Street, has made $24 billion (and counting as of last Wednesday) in profits by shorting software stocks. The crowd that has lopped a cool $1 trillion off the value of the software sector. And in the process, knocked the iShares Software Sector ETF (IGV) down -32% in 3 months.
But don't just take my word for it. According to an analyst at DA Davidson, "Hedge fund are all net short software right now." And then there's this from Goldman's Prime Brokerage unit, "This week's notional short selling in US Single Stocks was the largest on our record." Hmmm...
We've Seen This Movie Before
If memory serves, this is the same crowd that tried to sell us the AI bubble theme at the beginning of last year. And of course, that trade didn't work out so well and the performance of a great many hedge fund geniuses suffered because of it. Turns out that calling a top into a generational change in technology can be tricky!
Yet undeterred, here they are at it again. In the face of record earnings. Record revenues. Record growth. And of course, record expenditures on hardware investments. It's that last part where our furry friends in their bomber jackets seem to be making a stand - and profiting from their narratives.
The Issue
At issue here is the idea of what's called Capex, which is short for capital expenditures. Cutting to the chase, there is an arms race happening in AI. A race for dominance as the current thinking is that the next generation of computing will be a winner-take-all, or at the very least, a "winner-take-most" situation.
The idea is that the AI arms race is going to end up the same way the competition for internet search did a generation ago. Think back to the early days of the internet when folks used more than Google (GOOGL) or Siri to find stuff on the internet. Everybody knows Google has dominated search since then and printed a gazillion dollars in high-margin profit along the way.
The current bearish narrative is that AI will wind up looking similar - with one dominant player. Personally, I disagree vehemently with this concept as "AI" isn't a product you buy off the shelf. No, I see AI as the next generation in computing where there won't be just one winner or dominant player. There will be all kinds of winners and losers along the way. Because, the times they a changin'!
You can already see this happening with OpenAI. Three years ago, ChatGPT was all the rage and Sam Altman and friends appeared to be the only real player in the game. But then came DeepSeek. And Gemini. And Claude, Grok, etc. And don't look now fans, but the betting markets list ChatGPT as a distant third in the list of AI LLM usage by mid-year (FTR, Gemini is the now the big leader with around 70% and xAI is in second place).
I'm of the mind that there will be all kinds of winners in the next five years in all sorts of businesses. I.E. AI is so much more than just LLM (Large Language Model) chatbots.
But I digress. Let's get back to the "argument" and that arms race.
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